OUTCOMES ARE THE KEY FOR BUSINESS VALUE
Originally published in the January/February 2018 issue, Steve Martin, Head of the Glass Sector, Siemens UK & Ireland, outlines how Siemens is starting to work with glass manufacturers to tackle two key business challenges: the rising cost of energy consumption and unlocking the value that digitalisation offers to drive productivity enhancements and support improved competitiveness.
The answer lies in Siemens delivering business value ‘outcomes’ which positively impact the bottom line, without the need for companies to make capital expenditure investments today.
The publication of key findings from the Government’s recent Made Smarter review, which was chaired by Siemens CEO Juergen Maier, articulated how the UK needs to move forward in terms of the wide scale adoption of industrial digitalisation.
Estimates from the review indicate that industrial digitalisation could boost UK manufacturing by £455bn over the next ten years, create a net gain of 175,000 jobs and grow the UK’s manufacturing sector by 3% per annum.
In essence, it sets out a clear vision for Britain to be a world leader in the fourth industrial revolution, which in turn will deliver the improvements in productivity, manufacturing flexibility, growth and competitiveness the country (and our manufacturing sector) requires for future prosperity.
It’s not a matter of if, but when, as far as digitalisation is concerned. Experts such as Gartner are predicting that by 2020 – only three years away – 75% of UK companies will have deployed digital transformation as part of their ongoing business strategies.
And supporting customers on this journey lies at the heart of the innovative and market leading servitisation - or outcome based - approach that Siemens is seeking to deliver. For glass manufacturers, this includes solutions that help overcome core challenges of energy cost and digital adoption and supporting what is a traditionally conservative manufacturing sector to move forward.
A number of common barriers are currently influencing how glass manufacturers are successfully dealing with energy cost and digitalisation concerns.
First, a lack of dedicated and appropriately skilled internal resource and time constraints often means that progress is slow in this area. An inability or perhaps unwillingness to invest in a recruitment programme to supplement existing workforces with the new skills needed for a digital-based future could well be hampering ambitions. In some cases, it could be that companies are unsure how to deploy the resource once in place to derive good outcomes.
Next, companies are wary about the commercial viability of digital projects, often seeing them as ‘a leap of faith’. With many falling outside of CAPEX limitations, a desire to fund projects of this nature can waver, with decision makers reluctant within what is a capital intensive sector to press the investment button.
A lack of understanding of what the digital space can deliver in terms of business performance, production flexibility, productivity and growth is also hindering digital adoption. The absence of a vision or roadmap at the top of organisations - a result of not recognising the value digital transformation can deliver - means many businesses don’t know where to start, how to start and what process to go through. This inevitably leads to inertia.
Other associated barriers include a reluctance to commit to the benefits that cloud-based computing and secure digital data storage entail, as well as a lack of appreciation for the ‘power of a partner eco system’ that could see companies work in partnership to create outcomes rather than acting as rivals. Age old protectionism around intellectual property issues seen in the glass manufacturing sector must change to one of ‘digital trust’ if progress in any industrial digitised world is to be made.
It is to help overcome these barriers that Siemens’ business model has been disrupted and a move to ‘Service Orientated Business Structure’ developed. New service offerings around energy and digital adoption which, will tap directly into the energy and digital challenges outlined above and better support customers, are central to the commitment Siemens is investing in to guarantee a brighter future for UK manufacturing.
Siemens aims to facilitate processes that can unlock solutions to these challenges, by wrapping these solutions into a service offer which is commercial and measurable. Such services are underpinned with a payment plan that maximises the customer’s ability to control cash and profits.
Service-orientated model in practice
In a typical scenario, the customer may want to install a new asset or production equipment on site to improve their competitiveness or tackle energy consumption. They would raise the required capital via their CAPEX programme and procure from a machine builder (OEM) where Siemens would work on technology specification. The OEM would install the new asset on site with a standard warranty term and the end user is left to ensure the asset performs through its life.
In a ‘new world’, Siemens offers a service to deliver an ‘outcome’ the end user wanted from the equipment through a period of time. Siemens would procure and install the required asset using financial support from Siemens Financial Services (SFS) and deliver a performance based service with the customer being charged a monthly operating or service fee. Siemens would supply the technology hardware, the digital infrastructure, the service. For the customer, a shift from CAPEX to OPEX makes them more competitive, and allows them to spend on other strategic investments and improving their cash flow.
Looking at energy cost in particular highlights how an outcome based strategy could work.
'Energy as a Service' in Action – outcome driven
In an example, utility costs for glass manufacturing organisations can range typically between £8 and 20 million per annum. Siemens will commit to reducing those energy costs by up to 30% - saving the customer significant funds by focussing on outcomes. To put this in context, companies need only ask how much product they would need to sell to generate equivalent profit levels.
To create the total savings, the overall energy reduction project could be broken down to 10 individual projects that once complete will have a total cumulative saving for the business. Importantly, Siemens will commence on the individual project deemed to deliver the largest savings in year one and will not invoice the client until all 10 of the projects that make up the overall savings are finished.
At this point Siemens guarantees that the project costs will not be greater than the year one saving – meaning it guarantees ROI that is greater than 100% from day one.
This innovative model allows businesses to unlock savings within a timeframe of up to five years, when it would typically take between 10 to 15 years to realise.
Tailored payment plans are available from Siemens Financial Services depending on an organisation’s particular circumstances, with, for example, a cash rich business preferring to fund this through a series of CAPEX projects, while a heavily leveraged business won’t want to fund this until the savings are being realised. Even businesses that do not have access to short term CAPEX could work with Siemens to ‘install now / pay later’ when they get budgets refreshed.
As with Energy as a Service, the same approach applies to the adoption of digital solutions though Digital as a Service to aid manufacturing competitiveness, elicit production insight and drive product development flexibility.
We are on the cusp of a radical change across the manufacturing landscape driven by digitalisation. One where a combination of ambitious thinking, technological innovation and the adoption of new business models presents a tangible opportunity to drive UK manufacturing performance forward, deliver productivity enhancements and support national economic success.
This model is based upon a contract between Siemens and glass manufacturers that puts outcomes, not technology, at the centre of the commercial relationship. It is what the technology delivers for customers that is the critical element and will be the primary focus for Siemens going forward.